ibnlive » Business

RBI hikes key rates, loans to get costlier

Press Trust Of India
Jun 16, 2011 at 01:10pm IST

Michelin - Drivers Wanted
You are just a Click away from
Driving a Racing Car in Sepang!

Mumbai: Be prepared to pay more every month on your home, auto and other loans, as the Reserve Bank of India (RBI) on Thursday, for the 10th time since March, 2010, raised key interest rates by 25 basis points in its effort to control spiralling inflation.

The RBI has raised the short-term lending (repo) rate by 25 basis points to 7.50 per cent and the short-term borrowing (reverse repo) rate will move up by a similar margin to 6.5 per cent. It kept other rates and ratios unchanged.

The mid-quarterly policy initiatives, the RBI said, are expected to contain inflation, which is currently over 9 per cent, much above the comfort level of the central bank.

RBI hikes key rates, loans to get costlier

The rate at which RBI lends to the banks has been raised to 7.5 per cent.

"The RBI has sought to maintain an interest rate environment that moderates inflation and checks inflationary expectations," the Finance Ministry said in a statement, adding that this was on expected lines.

"We need to have price stability for sustaining growth in the medium term," it added.

Bankers said the move would put pressure on interest rates and may make loans costlier subsequently.

"It (RBI's move) will put pressure on short-term deposit rates and subsequently on the lending rates. But rate hike by banks would not be immediate," Indian Overseas Bank CMD M Narendra said.

While announcing the measures, the RBI said that tightening of the monetary policy would impact economic growth, which is already under pressure, in the short term.

With the rise in the repo rate, the interest rate for the additional lending facility of the RBI under the marginal standing facility (MSF) has gone up by 25 basis points to 8.5 per cent. This facility was introduced in the annual policy that was unveiled on May 3.

The monetary policy stance, the RBI said, "remains firmly anti-inflationary, recognising that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control."

The economic growth rate in the fourth quarter of the last financial year decelerated to 7.8 per cent from 9.4 per cent in the same period a year ago, raising fears of a slowdown.

Also, industrial production during April, 2011, moderated to 6.3 per cent from over 13 per cent in the same month last year.

The moderation in growth has not deterred the Reserve Bank into taking a pause on its rate hike strategy, as the "challenge of containing inflation and anchoring inflation expectations persists".

"Thus, while the Reserve Bank needs to continue with its anti-inflationary stance, the extent of policy action needs to balance the adverse movement in inflation with recent global developments and their key impact on the domestic growth trajectory," the RBI said.

Pointing out that the inflation is at an uncomfortable level, the RBI said the present wholesale price figures "understate the pressure because (domestic) fuel prices have yet to reflect the global crude oil prices."

Highlights of RBI's mid-quarter review of the credit policy:

RBI hikes repo rate (short-term lending rate) by 25 basis points to 7.5 per cent

Reverse repo rate (short-term borrowing rate) hence becomes 6.5 per cent

Marginal Standing Facility thus rises to 8.5 per cent

Other key rates and ratios remain unchanged

RBI says inflation persists at uncomfortable levels

Central bank says will continue with its anti-inflationary monetary policy.

Inflation spreading to non-food items a cause of concern: RBI

Inflation numbers understate the pressure as fuel prices have yet to reflect global crude oil prices: RBI

RBI says global commodity prices moderating, but too early to downgrade this as a risk factor

Impact of recent monetary policy actions still unfolding: RBI

Economic growth outlook remains unchanged at about eight per cent for the current fiscal

Forty-five banks raised base rate by 25-100 basis points after the May 3 annual monetary policy

Previous Comments

Latest

More from this section